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Chipotle Short Gives Einhorn 'Gas'

Written by: Antoine Gara04/23/14 - 9:01 AM EDT

Tickers in this article:
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NEW YORK (TheStreet) - David Einhorn of Greenlight Capital won't be wasting away in burritoville any longer.

Einhorn has closed his short trade in Chipotle Mexican Grill after a bet against the popular Mexican restaurant chain gave the hedge funder "gas." Greenlight appears to have lost significantly on its Chipotle short, after exiting the trade in the first quarter.

Greenlight Capital said in its first-quarter letter to investors it closed a short position in Chipotle shares at an average price of $417.56. Because Greenlight had bought shares at an average price of $320.29, the fund calculates its internal rate of return (IRR) was a loss of 33%.

The closing of the trade comes about 18-months after Einhorn first disclosed a bearish view of Chipotle at the Value Investing Congress in October 2012. At the time, Einhorn said that Chipotle might suffer from increasing competition, slowing comparable store growth and cost pressures.

At the October 2012 investor conference, Einhorn famously cited Taco Ball's Cantina menu as a particular risk for Chipotle leading many in the business media to conduct taste tests. Generally, the consensus was that Einhorn's numbers were compelling, however, his gastronome may have been misguided.

After a few disappointing quarters that gave credence to Einhorn's views, Chipotle was able to revive growth and use a heavy slate of store openings to grow the company's sales and earnings. Within a year of Einhorn's short, Chipotle shares had recovered, rising above $400 a share. From October 2013 through the first quarter of 2014, Chipotle's strong stock price performance continues, with shares rising as high as $622.90.

As of February, Einhorn continued to press his short trade and views that the restaurant chain would see its performance tail off. Chipotle was Greenlight's worst-performing short in the fourth quarter of 2013.

In April, Chipotle said it would raise its menu prices after mixed first quarter results that included an earnings beat but a significant drop in the company's operating margins.

Closing Positions, Opening New Shorts

Greenlight also said in its first quarter investor letter the hedge fund had closed a long investment in automaker General Motors early in 2014 after a weak full-year guidance from the company. That investment netted a 25% IRR.

A position in Delphi, an auto parts supplier, was closed at an even higher 47% IRR after the company's management "proved to be good stewards of excess capital, and the stock was re-rated as we had hoped," Greenligght said.

Other longs closed by Greenlighd included DST Systems , Merck and NCR, all at high IRR's. Shorts closed at a loss included Fortescue Metals , Lowblaw Companies and Michael Kors , all at above 20% negative IRR's.